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Cyprus became the latest euro zone domino to teeter in 2012 just when the worst of the crisis appeared to be over. In March 2013, a compromise rescue plan backed by euro zone finance ministers called for Cyprus to wind down one largely state-owned bank, Popular Bank. The raid on Popular Bank was intended to raise most of the 5.8 billion euros that Cyprus was required to raise as part of the bailout.

IMF Managing Director Christine Lagarde said that stabilising the banking sector of Cyprus was an “immediate priority.” Photo: EPA

The International Monetary Fund approved a US$1.33 billion (HK$10.3 billion) bailout loan for Cyprus on Wednesday and released the first US$110.7 million (HK$859.2 million) to the Cypriot government.

The loan is part of a combined US$13 billion (HK$100.9 billion) emergency financing deal set by the IMF and the European Stability Mechanism that aims to support the government as it seeks to restore balance to the ravaged Cypriot banking sector.

“It is intended to stabilise the country’s financial system, achieve fiscal sustainability, and support the recovery of economic activity to preserve the welfare of the population,” the IMF said in a brief statement.

IMF Managing Director Christine Lagarde said that stabilising the banking sector was an “immediate priority.”

“The authorities need to complete the bank recapitalisation process, including by using public funds for solvent institutions where necessary,” she added, noting that “decisive steps” would be taken to restructure weak banks.

“Temporary payment restrictions should be relaxed at a pace consistent with maintaining financial stability, while minimizing distortions to economic activity. It is important to strengthen supervision and regulation of banks and credit cooperatives, and to enhance the framework for anti-money laundering.”

The announcement came two days after the ESM, the European Union’s new financial stability backstop, handed over the first two billion euros of loans agreed under the controversial Cyprus aid deal.

The deal was set in March after the Cypriot government agreed to force depositors and bondholders in Cyprus’s leading banks to take huge losses in order to keep the country’s banking system from imploding.

The new funds came as official data released earlier showed Cyprus’s economy contracted by 1.3 per cent in the first quarter from the previous quarter, and 4.3 per cent year-on-year.

It was the seventh successive quarter in which the Mediterranean island’s economy has been in negative territory.

Construction, manufacturing, electricity, transport, trade, tourism and services all declined from January to March.

According to the IMF, the European Commission and the European Central Bank -- the troika of international lenders who set the bailout program -- the Cypriot economy is expected to contract 8.7 per cent this year and 3.9 per cent next year.